India joins G20-OECD Tax Framework deal

India and majority members of OECD and G20 Inclusive Framework on Base Erosion & Profit Shifting adopted a high-level statement that outlines a consensus solution in a bid to address tax challenges that are arising from digitalisation of economy.

Key Points

• This proposed solution comprises of two components:

1. First pillar is about reallocation of additional profit share to market jurisdictions and
2. Second pillar comprises of minimum tax and subject to tax rules.

• However, some significant issues like share of profit allocation and scope of subject to tax rules are open and need to be addressed.
• Technical details of proposal will be worked out soon and a consensus agreement will come by October 2021.

How will it impact India?

Pillar I of OECD and G20 two-pillar solutions of addressing tax challenge seeks to show a special purpose nexus rule and profit allocation formula to reallocate a part of super normal profits of largest and most profitable and multinational groups in market countries like India and China. The outcome will have quantitative benefits on India as it will ensure that India gets its fair share of corporate tax on earnings from market it provides to MNEs. Pillar II is the most significant step towards the race to bottom. Global Min tax rule will ensure that countries like India gets massive market for MNEs without providing tax safe harbor. This development has the potential to significantly contain practice of treaty shopping.

Treaty Shopping

In treaty shopping, companies or individuals attempt to indirectly access benefits of tax treaty between two jurisdictions without being resident any of those jurisdictions.

Month: Current Affairs - July, 2021